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Is The Natural Gas ETF Warming Up for a Winter Rally?

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The country is shivering with fears of another polar vortex with the winter approaching. Bloomberg recently reported heavy snow in Siberia, like last year, and some believe a great deal of snow in this region indicates how much freezing air will spill into the U.S. later this year, suggesting another brutal winter may be ahead of us.

Though Judah Cohen, director of seasonal forecasting at Atmospheric and Environmental Research was quoted By Bloomberg saying “It’s still early in the game”, the director indicated that there has already been an alarming start to snowfall. The analyst indicated that he needs some more time to analyze the trend before making a precise prediction, as noted by Bloomberg.

The ominous initial trend can be validated by the ‘snowcover’ data computed by Cohen.  As of October 13, 12.2 million square kilometers of Eurasia were roofed by snow relative to 10.8 million square kilometers from the year-ago date.

This rupture of potential chilly weather could definitely boost electricity demand across the region putting natural gas in focus. If this was not enough, the latest prediction of U.S. Energy Information Administration (EIA) indicated that people may have to shell out more money (by about 6%) for natural gas requirement in the winter of 2015.

This is true in the light of the fact that although natural gas inventory is rising fast, the latest stock piles still hover below the year-earlier and five-year averages.  For the week ended October 10, natural gas inventory remained 9.4% lower than the year-ago period and 9.9% lower than the five-year average, per EIA.

Market Impact

Thanks to this trend, the downslide in natural gas prices, which was being noticed for quite some time, was finally arrested. Prices in fact bucked the trend for a recovery on Thursday (October 16) trading, though the changes were not great. In fact, the ETF tracking the natural gas futures – United States Natural Gas ETF (UNG - Free Report) – shed about 0.1% on October 16 (read: Weak Start to September for Natural Gas ETFs: Will This Continue?).

In such a situation, an equity version of the natural gas could be a better choice to play the segment. Whatever the case and prediction, the U.S. is entering the coldest months of the year with subdued gas inventories. This is the reason why companies producing the commodity will try every means to churn out higher output before any downside knocks the door.

In order to do this, we highlight First Trust ISE-Revere Natural Gas ETF (FCG) – consisting of companies that derive a substantial portion of their revenues from exploration and production of natural gas – in detail (read: Alternative Energy ETF Investing 101).

FCG in Focus

This product offers exposure to the U.S. stocks that derive a substantial portion of their revenues from exploration and production of natural gas. It follows ISE-REVERE Natural Gas Index and holds 31 stocks in its basket that are well spread out, with each component holding less than 4.36% of assets. The fund charges 60 bps in fees.

Apart from stock holdings, investors should note that the fund has a blended style and is diversified across market cap levels with 35% in large caps, 37% in small caps and 28% in mid caps. This would also drive the fund higher given the mixed economic fundamentals.

Though FCG is only somewhat popular in the energy space having AUM of $326 million, it sees solid trading in volumes of 500,000 shares per day on average. The ETF has been extremely beaten down in the recent energy sell-off, having lost about 30% in the last three months.

However, the product was up about 3.4% on October 16 thanks to some hopes building on the space on the winter issue, and could be due for a rebound if natural gas demand picks up (read: 3 Energy ETFs Crushed by the Recent Sell-Off). 

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